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Oracle may inspire more big deals

December 2004

Oracle may inspire more big deals

Takeover of PeopleSoft could spur other companies to do the same

By David Morrill, BUSINESS WRITER Tuesday, December 14, 2004

PLEASANTON -- Oracle Corp. will now become the second-largest provider of business application software in the world after it announced Monday that it will acquire PeopleSoft Inc. for an all-cash offer of $10.3 billion. Because of the move, analysts believe other high-tech companies such as San Mateo-based Siebel Systems, Microsoft Inc. and IBM Corp. could have their eyes open for major deals of their own to stay competitive in the information technology industry.

"This consolidation has been going on for several years much like it has in the airlines industry," said investment banker Ken Marlin of Marlin and Associates.

For the business application software industry, which provides software for human resources and financial records, the absorption of Pleasanton-based PeopleSoft will consolidate the business application market to just two major players -- SAP, which controls 39 percent of the market, and Oracle, which will have 25 percent after the deal is complete.

"Finally, we now have PeopleSoft," said Oracle Chief Executive Larry Ellison during a conference call. "If Oracle is going to be a strong applications competitor, we had to get bigger."

For other business software makers, analysts believe there will be a scramble to try and claim the No. 3 slot in the stacking order of this market. Companies such as Microsoft Business Solutions, Lawson Software and the Sage Group are expected to try and seize this spot.

Oracle is already the world's largest supplier of databases, a position it hopes to strengthen by getting PeopleSoft's customers to spurn rival products from Microsoft, IBM and Dublin-based Sybase in favor of Oracle's wares.

The deal, which was negotiated throughout the weekend, will create an Oracle company that will have about 22,750 customers and more than 53,800 employees.

"It's a very, very big deal for Oracle in the form of giving them thousands of new customers that they can sell other products and services to," said industry analyst Jim Shepherd of AMR Research. "It's a great opportunity for them."

The final offer of $26.50 a share represents a 75 percent premium from PeopleSoft's market value before Oracle launched the takeover battle in June 2003. Oracle's most recent offer was $24 per share.

Wall Street embraced the news favorably as shares of PeopleSoft jumped $2.47, or 10 percent, to close at $26.42. Shares of Oracle rose $1.35, or 10 percent, to close at $14.63.

For employees at both PeopleSoft and Oracle, however, the news adds uncertainty to their future. Ellison said jobs will be cut on both sides, but he would not elaborate on how many.

"Companies like these have a lot of redundant personnel," PeopleSoft employs about 12,000 workers worldwide, and about 3,500 in the Bay Area. Oracle has about 42,000 worldwide and 10,000 in the Bay Area.

At one point, Oracle co-President Safra Catz testified that 6,000 PeopleSoft employees could be fired, but the company has since indicated that the number might be less.

The employees most at risk of losing their jobs are those involved in the administrative and marketing aspects of the business, Shepherd said. Engineers, and those involved with product support, are more likely to be retained, he said.

"At the end, there will still be thousands and thousands of PeopleSoft employees that will be a part of Oracle," he said.

Still, Dave Duffield, who took over as CEO of PeopleSoft after its board fired Craig Conway in October, wrote a letter to his employees saying he was "deeply saddened" that Oracle's takeover succeeded.

"I offer my sincere apologies for not figuring out a different conclusion to our 18-month saga," Duffield wrote.

Suddenly, what was expected to be a bitter proxy battle by both sides leading up to a PeopleSoft shareholder meeting in March is no longer.

"The fact that the two companies are neighbors and they both have obviously big personalities is what helped to make this rivalry so hostile," Shepherd said.

Those trying to grow will try to snap up PeopleSoft customers not willing to stick around after the merger is complete.

Seth Ravin, president of TomorrowNow Inc., a company specializing in software support, believes Oracle will "face some challenges" keeping PeopleSoft customers.

"Our phones have been extremely busy with calls from PeopleSoft customers seeking an alternative," he said.

Oracle will try to thwart this concern by continuing to develop new PeopleSoft products within a separate division of the merged company.

Oracle's other incentive is that PeopleSoft provided its customers unusual guarantees as it tried to stop the takeover. The guarantees could force Oracle to refund up to $2.4 billion to PeopleSoft customers if product support diminishes.

"We are going to make heavy investments to keep those customers happy," Ellison said.

Shepherd said that usually when mergers like this happen, there will be "wailing and gnashing of teeth before customers calm down, realize the world hasn't ended, and life goes back to normal."

While Oracle finally accomplished what it had set out to do in acquiring PeopleSoft, it did come with some major obstacles that had to be overcome.

The largest was the U.S. Department of Justice, which sought to block the deal because it believed the merger would reduce competition, thus driving up software prices and diminishing product innovation. A federal judge rejected the government's lawsuit in September, thus removing one of PeopleSoft's strongest takeover defenses.

The other was the need for Oracle to get the support of PeopleSoft shareholders.

On Nov. 1, it made its then "best and final" offer when it raised its bid to $24. At the same time, the company issued an ultimatum that if a majority of PeopleSoft shareholders didn't tender their shares by Nov. 19, then Oracle would pull its bid.

Once that happened, analysts believe PeopleSoft's boards finally saw the writing on the wall.

In the end, Marlin said it came down to Oracle's experience on how to acquire and integrate other companies into its system versus a PeopleSoft board that did not know how to stave off relentless hostile bids.

"PeopleSoft's board walked away from five separate Oracle takeover bids, and from our perspective their continuous refusal to negotiate was unsustainable," said Marlin of Marlin & Associates. "They were trying to preserve the companies independence from a human level, but they weren't experience on what they had to do on the fiduciary level."

Bloomberg News Service and the Associated Press contributed to this report.